Bronfman Rothschild 2016 Q1 Review: “Election Year Politics and Markets”
Election Year Politics and Markets
It is an election year, and we are in for a rowdy combination of mudslinging, anti-establishment rhetoric, rebellion of the “common folk”, economic protectionism, xenophobia, insults directed at spouses, attacks on the authority of the central bank, chirps of “morally unfit for office”, weak grasp of domestic and/or foreign policy, accusations of mishandling of government position, nepotism, calls for the re-distribution of wealth, and attacks on the financial elite. All this against the backdrop of two consecutive weak years in US stocks, battles over Greek sovereignty, weakening Chinese production dominance, and Russian neighbors worried about further imperial expansion.
Welcome to the elections of 1828. As Mark Twain purportedly said, “History doesn’t repeat itself, but it often rhymes.”
To set the stage, four years earlier (in 1824), in a Presidential election featuring four members of the same party, most political professionals at the time did not take Andrew Jackson’s candidacy seriously. They were quickly proven wrong as Jackson won the most electoral and popular votes, but did not have the requisite majority. Thus, the House of Representatives would be called upon to determine who would become the sixth President of the United States. House speaker Henry Clay (who was also a candidate, alongside Jackson, John Quincy Adams and William Crawford) put his weight behind Adams, and it is believed that a deal was struck between Clay and Adams, with Adams becoming the President and Clay becoming his Secretary of State (the deal later being called the “corrupt bargain.”)
Four years later, an outraged populace put its weight behind Andrew Jackson, who ran on an economic platform of:
- Protect the American people from the rich and powerful.
- Reduce the national debt and shrink the government (Jackson paid off the entire national debt, the only time in US history that has been accomplished).
- Strip the Second Bank of the United States of its central bank status and charter.
- Use protective tariffs to protect vital industries to the country’s defense.
Jackson personified the disenfranchised in a way that candidates on both sides of the aisle are attempting to replicate today (Donald Trump and Bernie Sanders come to mind). This has nothing to do with the markets, but it does highlight something that always comes with an election year, a determination of which president will be better or worse for the economy and financial assets. In most cases, you will get the good with the bad.
When Jackson assumed office in 1829, his anti-central bank rhetoric caused heart palpitations in New York. The then young stock exchange had just gone through a crisis in 1825, with trading volumes down 75% from their peak. Nevertheless, during his first term in office, the average stock on the exchange rose 12% per year. Yet, in his second term, Jackson finally managed to help close the Second Bank of the United States, which was soon followed by the Panic of 1837, and a recession that lasted until the mid-1840s.
Assigning all of the credit/blame for the direction of the economy to one person or presidency is short-sighted and often quite wrong. Financial markets are living organisms that are unpredictable and definitely not sustained by one factor, and anyone (economist/political pundit/money manager) who tries to forecast the economic future based upon this factor alone is playing a dangerous game. One only has to look at the inaccuracies of political and economic certainties of the past decade to see this in action:
- The Chairman of the Federal Reserve saying that there would be no contagion from housing in 2007 and 2008.
- The “fiscal cliff” and US credit downgrade would result in rampant increases in interest rates.
- Monetary printing (low/no interest rates and quantitative easing) will yield uncontrollable inflation.
In short, no one knows what the coming election will actually yield. Any associated calls are entertaining, but should be consumed with an enormous grain of salt.
The Markets – From Worst Ever, to Average in roughly 50 Days
January’s start for stocks was the worst on modern record, and by mid-February, pretty much every global index except for large cap US stocks were in bear market territory. Fifty days later, most of the red numbers had turned green. What fundamentally changed? Nothing really, but as we have seen, psychology, and not fundamentals, can drive markets over the short term.
US large company stocks (represented by the S&P 500 Index) rose 1.3% while US small-mid company stocks (represented by the Russell 2500 Index) rose 0.4%. International stocks (represented by the MSCI ACWI ex US IMI Index) fell 0.2%, while emerging market stocks (represented by the MSCI EM IMI Index) rose more than 5%, thanks in part to a near 30% rebound in beleaguered Brazilian stocks.
Fixed income investments in the US continued to defy gravity in Q1 despite the first rate hike in nearly a decade last December. The Barclays Capital US Aggregate Bond Index rose 3.0% for the quarter. High-Yield bonds, like stocks, also caught a reprieve mid-February and finished the quarter in positive territory. Foreign bonds also had a strong quarter, despite nearly $6.5 trillion of sovereign Treasuries now providing investors a negative yield (to give some context, that is nearly 1/3 of all developed sovereign debt.) In general, US Dollar weakness in Q1 provided a reprieve for non-US assets.
Some alternative investments struggled mightily in the quarter, with illiquid assets and equity momentum focused strategies in the red. Multi-strategy funds (represented by the HFRI FoF Diversified Index) fell 2.0% for the quarter. Hedged equity managers (represented by the HFRX Equity Hedge Index) fell 2.9%, with growth biased strategies underperforming value. Real asset investments (including Commodities, REITs, and Infrastructure) fared significantly better. Infrastructure rebounded after a tough 2015, while REITs benefited from investor hunt for yield and solid growth. Even commodities finished the quarter in positive territory, thanks to a slowdown in the decline of crude oil, and strong returns from precious metals.
- As mentioned above, the S&P 500’s eight percent decline in the first ten trading days of 2016 was the worst start to a new year in the history of the index (since 1928). For context, foreign developed markets and emerging markets lost roughly nine percent and eleven percent, respectively.
- Although not a true believer in such forecasting, looking at the S&P 500 over the same period, it does appear that some months are better to be invested than others. September has generally been a poor month, while October has generally been positive (although 1987 and 2007 were notable exceptions). December has generally been better than January, which contradicts two popular myths, the “December Selloff” and the “January Effect.”
- For the first quarter at least, stocks have been trading with oil prices:
- “Acknowledge the complexity of the world and resist the impression that you easily understand it. People are too quick to accept conventional wisdom, because it sounds basically true, and it tends to be reinforced by both their peers and opinion leaders, many of whom have never looked at whether the facts support the received wisdom. It’s a basic fact of life that many things “everybody knows” turn out to be wrong.” Jim Rogers.
- “Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.” Oscar Ameringer.
- Incidentally, for anyone so inclined to enjoy some 19th century profanity and ungentlemanly conduct, the battles between Andrew Jackson and John Quincy Adams are well worth a weekend read.